As both the global economy and the eCommerce sector continue to expand, so do the opportunities for third-party logistics (3PL) businesses.
Much of this opportunity has come from the explosive growth of eCommerce businesses over the last several years, which continues to trend upward.
But with big opportunities comes more competition. Because logistics has become such a booming industry over the last several years, many new competitors have entered the space. Many 3PLs that had seen steady growth over time suddenly struggled to expand.
While the current opportunities for increasing your 3PL company’s profitability are unprecedented, you may need to upgrade or double-down on some areas of your operations to take advantage of these unparalleled and favorable market conditions.
To increase the profitability of your 3PL in 2023, you’ll need to optimize your assets, people, and operations.
Let’s explore some of the most effective ways of doing just that.
Ways to increase 3PL business profitability
Planning and forecasting
Retail eCommerce sales reached 4.9 trillion dollars worldwide in 2021, and online sales are expected to grow by 50% over the next four years. By 2025, retail eCommerce sales will hit 7.4 trillion dollars.
eCommerce growth exploded during the pandemic, but it was part of a larger trend that had been building for over two decades.
Businesses that move and adapt quickly during market expansions survive and profit. Companies that are slow to respond to market changes pay the price for dragging their feet if they survive at all.
By staying abreast of consumer trends and market conditions, your logistics company will position itself to grow and profit from new opportunities, while other 3PLs follow the pack and struggle to keep up.
Customer retention is key
4% of businesses focus on customer acquisition, while only 18% focus on customer retention.
Here’s why that’s a critical error:
Your company’s probability of selling to an existing customer is between 60% and 70%.
Your company’s probability of selling to a new customer is only 5% to 20%.
What’s more, acquiring a new customer costs your business anywhere from 5 to 25 times more than keeping an existing customer, according to a recent article in the Harvard Business Review.
Bottom line: Increasing your customer retention rates by only 5% increases your profits by 29 – 95%.
One key factor in retaining your current customers is prioritizing excellent customer service. Another key factor is understanding which of your accounts are most profitable and why.
To improve your 3PL’s profitability, you’ll need to perform an analysis of every customer account to determine where you are making money and where you are losing it.
You’re probably familiar with the Pareto Principle, otherwise known as the “80-20 rule”. In terms of your 3PL business, it means that approximately 20% of your customers are responsible for 80% of your revenue. (And the remaining 80% of your customers are only responsible for 20%.)
To grow and scale your business, determine what your top customers have in common, and replicate your success with them by finding more like them.
Ensure you’re providing extraordinary customer service to your existing customers, especially your top 20%.
Service your core business
While keeping abreast of market trends is critical, staying focused on your core business is also important. Don’t allow your company to spread itself too thin when seeking new opportunities.
To increase your 3PL’s profitability, your most effective strategy is to concentrate on two areas:
- Your current core business, and
- A specific direction where you see an opportunity for growth
Once you’ve chosen the direction you plan to grow your business in the future, commit to it. Devote your company resources to being better than any other logistics firm in your chosen segment while you expand. Finally, continue to service your core business as you grow to remain competitive, viable, and profitable as you expand.
Make sure you communicate your commitment to servicing your core customers and your initiatives to grow your business from your leadership team to your warehouse employees.
When your entire team understands your 3PL’s vision and plans for the future, they can facilitate workflows around achieving those goals.
This helps your 3PL to clarify:
- Necessary technology upgrades
- Hiring needs
- Staffing adjustments and allocation
- Marketing goals
By focusing on both your company’s present and its future, you’ll best position your 3PL for long-term success and profitability.
Auditing your processes for efficiency
Auditing your current warehouse processes for efficiency can offer significant opportunities for cost savings.
Every process in your warehouse should be considered, scrutinized, and tested for inefficiencies.
That includes your equipment.
While it may seem like a cost-savings to try to squeeze one more year out of an outdated piece of equipment, you should consider what you are losing in terms of time and labor. Often, upgrading your equipment will save you money in the long run.
Any optimizations you implement in your warehouse processes compound over time, as they are repeated over and over again. This means that even small optimizations can result in a major effect on your bottom line.
Labor and warehouse automation
While we’re on the topic of making your processes more efficient, automating tasks in your warehouse saves time, money, and reduces human error.
Why is this important?
After shipping and warehouse costs, labor is often one of your 3PL’s biggest expenses.
Your staff members have an enormous impact on your company’s profitability.
It’s key to your 3PL’s success to measure the performance of every person on your payroll. This includes evaluating the investment you’ve made in their training.
Your employees’ performance impacts your company’s profitability every hour of every day.
Even the tiniest improvement can have a major impact on your company’s efficiency and profitability over time.
For example, while efficiencies can grow your revenue, errors such as mis-picks can easily cost your 3PL hundreds of thousands of dollars in lost revenue each year.
Consider your plans for your 3PL’s immediate and long-term growth as you begin to automate your warehouse operations, as well as the areas where your business needs the most improvement.
Automating your 3PL’s labor and warehouse operations is one of the most effective methods to increase your 3PL’s profitability.
Upgrade your technology where you can
Many 3PLs spend a significant amount of time manually tracking inbound and outbound inventory and invoicing customers.
Technology upgrades are the quickest, most reliable, and easiest-to-implement methods to realize higher profits.
Implementing SkuVault Core’s pay-as-you-grow warehouse management system streamlines your processes to increase your revenue.
A WMS system integrates with a variety of software platforms to enhance your logistic team’s productivity and save labor on repetitive and duplicative work.
Your WMS gives your logistics company seamless integration with a wide variety of eCommerce applications and offers 24-7 inventory transparency for both you and your customers through their own dedicated dashboards. This transparency is one of the key building blocks of customer trust.
When evaluating a warehouse management system, you’ll want to ensure your WMS can integrate with:
- Online shopping carts
- Transportation Management Systems
- Small parcel shippers
- As well as automated dock scheduling
It’s also important to consider how your existing and potential customers perceive your 3PL’s technology. The perception that your business is not as efficient or state-of-the-art as your competitors puts you at a significant disadvantage.
Upgrading your technology is generally worth the investment and increases your 3PL’s profitability in the short- and long term.
Use your warehouse space profitably
Slow-moving inventory takes up valuable warehouse space and drains revenue. To prioritize more profitable, fast-moving inventory, consider long-term pricing storage at a higher rate.
To maximize the profitability of your warehouse space, charge customers with slow-moving products a premium for the space they’re occupying in your warehouse.
Enhance your marketing strategy
Effective 3PL marketing strategies can increase your company’s brand awareness, create customer preference and grow your bottom line.
- Defining your position in the logistics marketplace
- Cultivating a unique brand voice
- Investing in being exceptional
- Using inbound marketing, including blogging and video marketing
- Utilizing outbound marketing, including email campaigns and database targeting
- Paid search
- Search Engine Optimization
- Social media tactics on platforms including LinkedIn, Twitter, Instagram, and TikTok
Enhancing your 3PL’s marketing strategy should be a crucial component of your overall strategy to increase your revenue.
To increase your 3PL’s profitability in 2023, you’ll need to take every opportunity to optimize your business, from your staff to your warehouse management system.
This means being aware of emerging opportunities, being disciplined about your growth strategy, providing excellent service to your current customers, and upgrading your technology whenever possible.
It’s an exciting time for growth in the logistics industry, so make certain your company is prepared and poised to scale your business and explode your revenue.